Rahul Khullar: Disinvestment dilemmas

Disinvestment is supposed to result in improved management of public sector enterprises and incidentally, raise revenues. However, the revenue motive has dominated, to the exclusion of all else

Disinvestment proceeds are an important source of non-tax revenues that reduce the size of market borrowings (fiscal deficit). The finance minister's Budget speech this year signalled a more progressive view including strategic sales, disposal of land, etc.; in a word, better public asset management.

But first, some economic history to understand the genesis and rationale of the public policy.

The Reagan-Thatcher paradigm shift raised the question: Why is public ownership at all necessary if the desired outcome can be delivered more efficiently by the private sector? Other issues arose: Is public ownership the reason for inefficient management? (Think sectors like paper, cement, air services and textiles where the private sector does fine.) Do conflicting objectives lead management to sacrifice commercial goals? (Think railways, water utilities, BSNL, MTNL.) Or is public ownership responsible for loss of commercial perspective? (Think public sector banks or PSBs.) The message was clear: privatise where it is commercially viable; close where it is not viable and the private sector can meet supply; where turnaround is possible hive off after it turns profitable; and retain public ownership only where a clear demonstrable social purpose is being achieved that cannot be realised through the market. The focus was on improved performance and management, not revenues from asset sales.

Now, some stylised facts. Disinvestment budget targets are rarely, if ever, realised. And, the favourite fallback is to squeeze PSUs for more dividends (thus reducing their sale value). Disinvestment is supposed to improve public management of PSUs and incidentally, raise revenues. However, the revenue motive has dominated, to the exclusion of all else. Lastly, since 1991, except for the Vajpayee government, none had any disinvestment strategy.

Minority stake sales are the most popular. However, there are numerous problems. On the demand side there are few takers for PSU stocks at "market" valuations. And there is the lingering dread that the government's intervention will compromise commercial goals. Second, many PSUs are not even listed on the stock exchange (even though SEBI exempts them from compliance norms applicable to private firms). Where small amounts of shares are in the market, trading in thin markets leads to highly volatile valuations; and a sale leaves the government open to charges of a scam. Lastly, roiled stock markets are not conducive to such sales for much the same reason. The perfect hindsight of the CAG and the CVC deters decision-making. So even selling listed PSUs is not without risk. Given political and bureaucratic risk-aversion, can we be confident that disinvestment will be realised?

Strategic sales are of two types: outright disposal and majority divestiture but not 100 per cent. Such sales were seen in the Vajpayee government - Maruti, Hindustan Zinc, VSNL, and hotel properties. Some attracted political flak and allegations of graft. In retrospect, it is clear that the transactions were completely transparent and that the allegations were baseless. The rationale for less than 100 per cent divestiture is straightforward: if private management improved performance, the value of the residual shareholding would rise. The main problem is valuation. And it is acutest for an outright sale. Strategic sales remain thorny and are not for the faint of heart. So would you expect bureaucrats to go where angels fear to tread?

Implicit in the FM's speech was the idea of closures. How else could assets like land be monetised? Now, the press reports that annual losses of loss-making PSUs are Rs 25,000 crore. Every government has flinched on closures though the benefits are far higher than from minority stake sales. A closure that yields, say, savings of Rs 2,000 crore in perpetuity implies actual savings which are 8-10 times the annual savings - i.e. a manifold multiple of an equivalent amount from a simple disinvestment. Pause to ponder why the Indian taxpayer should pay, year after year, for losses of HMT, Hindustan Photofilms, HEC, HFC and Fertiliser Corporation of India and NTC. And this does not include Air India, BSNL and MTNL. Closures will require courage and building bridges with the Opposition. It is worth a stab for the first majority government in 30 years.

The public asset management agenda rightly ought to extend to ensuring that no poor new investment decisions are taken. The fertiliser units at Gorakhpur and Sindri have been dead for 30 years. India's conversion costs for fertilisers are among the highest in the world (three to five times the energy use elsewhere). It would be cheaper for us to import; even to invest in a new 100 per cent PSU in, say, Oman. And yet we perversely persevere in throwing good money after bad. So we will invest in ventures that are guaranteed to bleed the exchequer. Land is the most valuable asset of the PSUs. In the older and larger PSUs, huge tracts of land exist (plants and townships). Some are unencumbered land assets; in other cases they were taken on long-tenure leases. Both are disposable. Consider NTC: a large number of textile mills that are a viable land bank. Even if a profitable mill is to be sold, its value lies in the land, not in it as a going concern.

Lastly, it is necessary to experiment with alternative managerial solutions. Two examples without ownership change: Why can't CIL hand over new mines on a fee/share contract basis to a private operator? Why not induct turnaround management teams (say, a chairman-cum-managing director, and six to eight professionals at market compensation) for some of our ailing PSBs?

To sum up, what do we do: Leave the minority stake sales to play out; some will get done, some not. Start listing the larger PSUs for potential sale in future years. Expend energies on closure of zombie firms; payback is larger and hopefully it will be easier to garner political support for chronic loss makers. Focus on strategic sales with majority share transfer (over 51 per cent); easier to defend politically and economically. Try some outright sales; but watch out for problems of valuation surrounding an unlisted PSU. Make a start with sensible public asset management. All of this will require strong political leadership and efforts to reach out to others in Parliament. And, it seems worth it.

The writer is a former Union commerce secretary